Mutual Safety Checkpoints for In3 CAP project finance
There are a series of checkpoints to satisfy anti money-laundering (AML), the US Patriot Act, Foreign Asset Control rules (US OFAC) and bank Anti-corruption requirements (conventions and treaties) for undertaking to finance projects through us. The process of putting our respective bona fides (good faith measures) on the table enables both parties to Know Their Customer (KYC, or KYI, know your investor), making sure the funding is “clean” and “clear”, from a reputable source, free of ethics violations, restrictions or sanctions. This ensures there is no reputation risk for any parties, the main goal of the KYC.
In addition, we strive to be entirely transparent and direct about how we work, fees or other costs, likely timing and benefits or advantages we see when selecting CAP funding or other programs or service bundles.
Here are the main safety measures and checkpoints:
- We do not ask for any up-front commitments. In3 invests substantial time, money and effort (covering our staff or consultant costs, legal service fees, etc.) to reach a clear go/no-go decision with project teams and sponsoring guarantors, if any, for our partners’ funding. By the time the parties are mutually satisfying the requirements of one another, after project fundamentals are disclosed (what we call initial screening), with the file vetted and verified, once we are convinced it is feasible/viable, we will then offer to put in place binding terms and commercial contracts to deliver the funds per the agreed-upon schedule. This is both ethical and practical — we mutually cover our own costs (a cost of doing business) in order to determine if there’s a fit, but the lion’s share of benefit goes to the project team in the event of financing. NOTE: In3 does occasionally enter Management Services Agreements for advisory or pre-due diligence assistance (vetting), or to assist as project co-developers within our areas of expertise. Such services deliver value (IFRS-compliant financial modeling, for example) that largely de-risks the critical liabilities or hazards, with optional insurance wraps available. Such ancillary services are related to but separable from securing the project’s necessary funding. This preparation is often necessary when developers cannot perform these functions entirely on their own.
- To start, we receive the profile for the developer, and ask if the developer will be able to satisfy the requirements for funding. If so, the developer is then given access to In3 Capital partner information, past projects/clients (preserving confidentiality), testimonials, etc. The project owners demonstrate pre-qualification via the 6 essentials. This package launches formal Due Diligence and also results in a meeting, typically via a video conference call, to meet the Family Office (FO) partners … a “meet & greet” with Q&A between the principals directly. This can occur once pre-qualification is complete, or nearly completed, and usually clears up any lingering hesitancy with new borrowers, as the parties are free to ask whatever questions they wish to ascertain facts that are deliberately withheld for the sake of confidentiality. Our partners tend to be quite open and transparent about how and why they operate as they do once there’s evidence from the developer / sponsor / bank that the project is qualified to justify such a meeting.
- Before offering formal proof of funding (attestation), the FO requires evidence that the guarantee’s banker is on board and not being spoofed. We use a simple letter and one-way Email to check that the involved banker is on board. We cannot accept a SWIFT at the funding bank instead of this verification. Why? Too many bankers are unwitting victims of identity theft (someone that pretends to be an actual banker, but really just stole their email and credentials), so we have to check this before we can introduce any SWIFT messages to our bankers. Industry standard practice is also that the funder does not make the first move — the party seeking funding makes the first move, which is only ethical and practical. We run into parties that seek to know everything about this quite private Family Office that will never qualify to receive our funding. We’re thus obliged to protect our partner’s privacy. That said, at this stage, under our NCNDA, we can sometimes offer confidential references when there is a qualifying project on the table with a bank-involved financial instrument drafted and accepted. In exchange for verification of the involved banker and our proof of funding capacity, we would want to receive the developer’s background information (resumes or CVs) and then later, a simple Customer Information Sheet (CIS), delivered directly to the Family Office.
- Following the FO’s due diligence, assuming they wish to fund the project, the parties enter into a negotiated arrangement to establish the finance facility; a binding term sheet is also available at this step, but we rarely use one, as the funding contracts accomplish the same thing, and sometimes details must be ironed out in legal language anyway, so we almost always skip the term sheet in favor of the funding contracts. There can be specific Condition Precedents (CPs) that obligate the parties to take additional steps, such as for the FO to demonstrate funding capacity as a prerequisite of closing. The lawyers get to figure this out, if or as needed. Such CPs are built into funding agreements, which are always customized.
- The parties sign/notarize agreements (Loan Agreement, Share Purchase Agreement, letter from the developer re: fees, any side agreements, etc.), then MT799 or MT199 SWIFT pre-advice, based on our template and the agreed-upon instrument verbiage, gets sent to the FO’s funding bank by the bank issuing the guarantee; if the funding bank replies, it commits to the fact that it stands “ready, willing and able” (RWA) to fund the project, on behalf of the FO (its customer), obligating the corresponding bank to do so per the draw schedule on behalf of the undertaking. If the FO’s bank does not reply to this SWIFT MT799/199, they’re not RWA. Simple. We will make sure that clients are comfortable with these arrangements. We can also put in the funding contract that the client may cancel or withdraw the issued guarantee anytime for non-performance on our FO’s part. These are all standard assurances (such as via SWIFT MT192 to cancel). These confirmation steps assure the sending bank that, once under contract, upon receipt of the guarantee instrument, the FO’s bank has both the capacity and makes the contractual commitment to deliver all the agreed-upon funding per the established monthly draw schedule.
- The signed original instrument (hardcopy) is sent via courier and received by the funding bank, thus constituting financial closing. See all the formal steps, from “inception to completion” in 1 page (PDF).
At this point, the commercial contracts bind the investor and project owner to their respective, mutual obligations, but reasonable accommodation for further indemnification or proof that full funding will be delivered can be made available upon request. - The FO obtains insurances or whatever else they need to deliver funding per the pre-approved drawdown schedule, with first funds transferred within at most 30-45 days from closing. NOTE: Prior to the first draw, for whatever reason, the instrument can be withdrawn or unwound (taken back, also known as a right of rescission) if the issuing party so chooses. We can’t think of a reason why anyone would do this, having come all this way, but it is still true that the “irrevocable” aspects of demand guarantees does not commence until the first draw of funding against it. This is a layer of added protection, in case the FO were to fail to actually finance the project per their commercial obligations. This mechanism exists because, under well-established rules for such demand guarantees, the callable value of the instrument is initially zero, which then ratchets up as each draw is made against it, up to the maximum (face value) of the instrument. More on this topic at FAQ #7
Note: the provided guarantee will not be called arbitrarily. That cannot occur. The Family Office would have to prove malfeasance/fraud/uncured breach of contract (Loan Agreement). Its purpose is mainly to filter out fraud (more via FAQs). If requested, the guarantee itself can be worded so that no claim can be made against it until a certain number of days before or after its maturity date. That is, as a matter of good faith, the Family Office could not even begin to notify of perceived wrongdoing for 1-3 years (depending on the expiration date set forth in the instrument itself), providing a further incentive for the parties to work out issues that arise, with a lengthy “cure” period for doing so, to fully cooperate and seek solutions, and to complete/commission the project assets to begin commercial operations per respective contractual obligations.
This business logic (operating project assets are of far greater value than the pieces/parts) as well as the overarching purpose of these guarantees used for project financing (aligning incentives to finish the job) serve as a type of completion surety. More on Capital Guarantees. | How they differ from insurance products (completion, payment or performance bonds)
Stepwise Guide to Completion Assurance Program (CAP) funding success.
Finance-ability Checklist for developers
Let us know if you have questions pertaining to a qualifying project.